IMF's Lagarde: Oil Slump Can't Save Global Economy

Christine Lagarde says the drop in oil prices won’t be enough to save the global economy, but the International Energy Agency says it will be enough to slow down the U.S. shale revolution. After the biggest rout in oil since the 1980’s, is there hope that perhaps we have found a short-term bottom?

Well maybe not from the demand side, especially if you take the words of IMF Chief Christine Lagarde to heart. She pondered “Should lower oil prices and a stronger recovery in the United States make us more upbeat about the prospects for the global economy?" The answer is most likely, No!

It appears that Ms. Lagarde is backing off her previous comments that on balance the drop in oil would be a net positive. While it may still be a net positive, it isn’t going to be enough. Yet Christine does get the award for the understatement of the day when she said "that the move by the Swiss National Bank to remove its peg to the Euro Currency” was a bit of a surprise.

It is not going to be enough to save many shale producers either. The International Energy Agency is giving oil a bounce after it predicted that a drop in non-OPEC production {shale oil} will increase oil prices later in the year. They also surprised the market by keeping their demand outlook steady.

The International Energy Agency said that while macroeconomic weakness continues to restrain global oil demand growth, with fourth quarter 2014 deliveries estimated just 0.6 million barrels per day (million barrels per day) above year-earlier levels. Despite lower prices, with Brent crude futures near a six-year low, demand growth is forecast to accelerate only 0.9 million barrels per day  2015, unchanged from the outlook in the December report.

The oil selloff has cut expectations of 2015 non-OPEC supply growth by 350,000 barrels per day. Effects on North American supply are so far limited to 95,000 barrels per day and 80,000 barrels per day to the Canadian and U.S. forecasts, respectively. Projections are cut by 175 kb/d for Colombia and 30,000 barrels per day for Russia. They also reported that OPEC output rose by 80,000 barrels per day in December to 30.48 million barrels per day, as Iraqi supply surged to 35-year highs, offsetting deeper losses in Libya. Downward revisions to the non-OPEC supply outlook raise the “call” on OPEC for the second half of 2015 to an average 29.8 million barrels per day – just shy of OPEC's official target of 30 million barrels per day.

They also reported record global refinery output as the world is producing more product than ever before! The IEA says that global refinery crude throughputs surged to a record high of 78.9 million barrel per day in December, lifting the fourth quarter 2014 estimate to 78.2 million barrels per day. But throughputs are forecast to ease seasonally to 77.8 million barrels per day in the current quarter, amid brimming product inventories, weakening margins, lower demand and increased refinery maintenance.

The IEA also provided a special focus on the surge in Iraqi output as well as informed subscribers about recent developments in Chinese and Singaporean stocks and how widening contango has renewed interest in floating storage.

So oil has to balance against a weak demand global outlook versus cut backs in production. We should start to see the impact of refinery slowdown and the lack of new rigs in the next 6 months. Declining production at existing wells will be felt even more towards the end of the year. So we are seeing signs that the oil market may adjust, giving hope that $44 will be the final bottom. Yet that will depend on the fallout from the turmoil in global markets. There are significant downside risks and the dramatic move by the Swiss Bank yesterday is a sign that central banks will have to take significant action to stop a global deflationary meltdown. With the Greek election ahead and money running to gold and U.S. treasuries to head from these problems could mean the other shoe may be about to drop. If that shoe does drop, oil bottom pickers will say enough is enough.

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